Scotland's Budget Report 2018

Fraser of Allander Institute; Eiser, David. (2018) Scotland's Budget Report 2018. University of Strathclyde, Glasgow.

[thumbnail of FAI-2018-Scotlands-budget-report-2018]
Preview
Text. Filename: FAI_2018_Scotlands_budget_report_2018.pdf
Final Published Version

Download (3MB)| Preview

Abstract

The Scottish economy has picked up in recent months, with growth nudging ahead of that in the UK as a whole. Employment remains at high levels and conditions have certainly improved relative to our 2017 Scotland’s Budget report. However, growth remains weak by historical standards. Annual growth of 1.4% on a 4Q-on-4Q basis remains well below trend. Growth has not been above 2% on an annual basis since early 2014. Brexit uncertainty continues to weigh heavily on the outlook, with most forecasters predicting that both the UK and Scottish economies are in the midst of an unprecedented period of uncertainty. Looking forward, most forecasts are for growth to remain fragile for the next few years with weak productivity being the key factor. Of course, what matters most in the context of Scotland’s new Fiscal Framework is how the Scottish economy, and revenues from Scotland’s devolved taxes, are performing relative to the rest of the UK. Whilst economic growth has picked up in recent times, this follows a number of years when Scotland had been lagging the UK. The Scottish Fiscal Commission will publish updated forecasts for the Scottish economy and tax revenues alongside December’s Budget. Their previous forecasts have assumed that the Scottish economy would grow slightly slower in per capita terms than the OBR has assumed for the UK. It seems unlikely that relatively positive news recently on economic growth will result in a major revision to the SFC’s outlook for GDP growth in the near term. What is also critical is the SFC’s forecasts for employment and earnings, the key drivers of income tax revenue growth. In May, the SFC revised down its forecast for Scottish earnings growth, which had a knock-on impact for the outlook for Scottish income tax revenues. Under the Fiscal Framework, these forecasts did not have an immediate impact on Scottish public spending in 2018-19, but should the SFC adopt a similar pessimistic outlook this December then it will have a significant impact on the Cabinet Secretary’s potential spending power for 2019-20.